WSJ is Super on Reserve Primary Fund Story

The Journal is excellent this morning with an in-depth report on the Reserve Primary Fund, the money-market fund that “broke the buck” in September and was a key contributor to the wave of panic that hit in the middle of that month.

Its good narrative journalism built around the story of an innovator who lost his way.

All this heightens a unique Wall Street drama: of a financier who pioneered a way for small savers to earn more, grew rich in the process, preached a principle of extremely cautious investing for decades, and then abandoned that principle — in time to see the credit crisis decimate his empire…

For years, Mr. Bent railed against investing money funds’ cash in anything riskier than Treasury bills and bank certificates of deposit. He singled out for scorn commercial paper, short-term corporate debt that’s commonly unsecured.

“Commercial paper is anathema to the concept of the money fund,” Mr. Bent told Reuters in 2001. “People prostituted the concept by putting garbage in the funds and reaching for yield.” The following year, he told Investor’s Business Daily that “we don’t drink, smoke or buy commercial paper.”

Yet in 2006, with the Primary Fund underperforming rivals, it went on a commercial-paper buying spree. It acquired so much of this higher-yielding but riskier asset that by September 2008, the fund’s yield was tops in its class. But $785 million of that paper was Lehman’s.

And it has great detail on the company, including a food anecdote that actually illustrates something instead of being, ahem, fodder for one of our “useless-detail alerts”:

They ran a frugal shop, their Manhattan office so modest that Messrs. Brown and Bent sat in the same room, at facing desks. The office Christmas party, ex-employees say, amounted to free sandwiches, eaten at the desk.

And this anecdote tells us all we need to know about whether to have sympathy for the guy (who is also doing this):

In 2001, Mr. Bent tried his hand at politics, running as a Republican for county executive of Nassau County, N.Y. Sen. John McCain appeared in a television ad for him, saying Mr. Bent was a Marine who would provide “straight talk.”

One problem, says Mr. Bent’s campaign manager, Michael Dawidziak, was that “you could not control his mouth.” According to press reports at the time, Mr. Bent boasted that he had fired his brother, Arthur. Arthur says that wasn’t the case. And before a televised debate with his Democratic opponent, whose dog had recently died, Mr. Bent, in an apparent attempt to rattle his foe, inquired, “How’s your dog?”

Hey, Bent—how’s your company?

The Journal clearly shows how Bent sold out his principles to chase a buck. What’s worse, he kept preaching his one-time principles even after he’d gone over to the dark side. And it looks like he’s got some big legal problems:

Reserve said an administrative error had caused it to miscalculate the fund’s value throughout much of Tuesday, Sept. 16, the day it closed at 97 cents. The true price wasn’t a $1 a share during most of the day, but actually 99 cents from 11 a.m. to 4 p.m., the company said.

The reason was that Reserve had written down the value of its Lehman commercial paper by 20% the previous morning — hours before telling investors it expected the paper to hold its value. Reserve declined to explain the apparent contradiction.

Great story from the Journal.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.